V. 19:12 (83-85, 93): Working Money: A Taste Of The Big MACD by Amy Wu

V. 19:12 (83-85, 93): Working Money: A Taste Of The Big MACD by Amy Wu
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Working Money: A Taste Of The Big MACD by Amy Wu

Indicators like the moving average convergence/divergence help you confirm signals and decrease risk when buying and selling securities. Invented by Gerald Appel in the 1970s, the MACD has become a staple in the world of technical analysis. Here’s how you can make use of it.

One of the most popular indicators used in technical analysis is the MACD (moving average convergence/divergence). In its most common form, the MACD is calculated by taking the difference between a 26-day and a 12-day exponential moving average. This difference, sometimes referred to as the price oscillator, will vary depending on the momentum of the security. A second line, called the signal or trigger line, is created by taking a nine-day exponential moving average of the price oscillator.

The MACD is a trend-following indicator, moving in the direction of the prevailing price movement. This should be apparent, since it is based on moving averages that are calculated by using a security’s price history. Since the price oscillator is the 12-day minus the 26-day exponential moving average, a difference of zero results in a horizontal line. Such a line indicates that the 26-day and the 12-day moving averages are changing at the same rate. In general, the quantity of the difference and whether it is positive or negative show how much faster or slower the exponential averages are moving relative to each other.

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